Past performance, as the health warnings say, is not necessarily a guide to the future. It is a warning investors should heed, but all too often ignore. Professional fund managers and retail dabblers alike are prone to piling in to the best performing investments just as they begin to falter.

The pitfalls of this strategy are highlighted at this time of year when fund analysts bring out their league tables of the top funds and sectors. It is uncanny how frequently the best performing sector in one year plunges to the bottom of the heap in the following year or two. Yet, all too often, these sectors are also the ones which attract the most funds from investors in subsequent months.

Patrick Connolly, head of communications at AWD Chase de Vere, has dug out some recent examples for us to illustrate this. In 2008 he says Global Bonds, UK Gilt and UK Index-Linked Gilts, Money Market, and Absolute Return funds were the top performing investment sectors. Investors duly piled into bond funds: according to the Investment Management Association, bond funds were the biggest sellers in five of the seven quarters for which statistics are available in 2009 and 2010. And what were the worst performing sectors in 2010? You guessed it: Global Bonds, UK Gilt, Money Market, Absolute Return, Sterling Corporate Bond and Sterling Strategic Bond.

Some of the worst performing sectors of 2008 also had a change in fortune, this time for the better: UK and European Smaller Companies, Global Emerging Markets and Asia Pacific all climbed from bottom to top over that period. None attracted much interest from investors, however – indeed, global emerging markets and smaller company funds proved particularly unpopular.

It is tempting to conclude that the best strategy would be to spread your money between the worst performing sectors in any 12-month period. That would certainly be a better plan than piling into the leaders at the top of the market, but there is a big caveat: it is very hard to turn a perennial loser into a big winner. So, at the individual fund level, those which have spent years propping up the bottom of the table are unlikely to suddenly shoot to the top without radical action, such as changing the manager.

A better option than trawling through the league tables, Connolly says, is to hedge your bets by building a balanced portfolio of assets to increase the chance that at least some of them will be doing well even if others are out of favour.

That is particularly pertinent for anyone who is excited about the recovery in the stock market. Year-end pundits were united in predicting that the rally would continue: Connolly, however, frets that they have already seen two years of excellent returns and, while that does not necessarily mean they are poised to fall, it does mean it is sensible to be cautious. Instead of following the herd into the latest equity fad, perhaps include some property, cash and bonds as well.

"We believe equities, particularly equity income, represent good value," Connolly says. "However, with unprecedented levels of global economic uncertainty it may prove foolhardy to sell out of lower risk holdings such as fixed interest based on short-term market sentiment."

Of course, we all want to buy at the bottom and sell at the top, but identifying the turning point is all but impossible, particularly if you are looking at individual shares. Two examples last week illustrate this: shares in BP briefly climbed above 500p for the first time since last June, a 60% increase from their low point despite a damning report on its management and risk procedures in the run up to the Gulf oil spill; shares in HMV, by contrast, fell almost a quarter as it announced store closures, despite the fact it is still profitable and has good cash flow.

BP's recovery reflects investors' realisation that, despite the spill, it has an impressive collection of assets which could be sold if necessary – and putative bidders like rival Shell have already been considering the possibility of a takeover.

HMV's assets, in the form of leases on its shops, are becoming less and less valuable as the internet takes over more of its core gaming and book-reading customers. While BP clearly has considerable work to do to regain the trust of regulators, investors and the public – and could still face substantial legal and compensation bills – managing a business in structural decline like HMV could be far more challenging.